Turkey’s economy struggles with new political reality

Turkey’s economic downturn has only grown worse since President Recep Tayyip Erdogan assumed sweeping new powers after the June polls, as some observers fear that the economy might not be Ankara’s primary concern.

Since the June 24 elections, Turkey’s rulers have been trying to squeeze the nation into the clothes of a one-man regime. This outfit was sewn by the Justice and Development Party (AKP) over its 16 years in power, partly in tandem with Fethullah Gulen’s religious community, which the AKP now labels a terrorist group. Given Turkey’s advanced level of integration with the globalized economic order, this new political garment has spawned a big question about the fate of the already ailing Turkish economy. Can the financial system carry on within the confines of this attire? Will domestic and foreign economic actors be able to adapt and acquiesce to it?

Made of conservative, Sunni Islamic cloth, the new outfit is tailored for a governance style that subordinates the legislative and the judicial branches almost exclusively to a single person — the president. The arrangement — officially called the presidential government system and narrowly approved in a controversial referendum in April 2017 — took effect after the June 24 elections, in which President Recep Tayyip Erdogan won re-election.

Compared with other emerging markets such as Brazil, India, Mexico and South Africa, Turkey stands out as the one with the highest level of power concentration in single hands, with constitutional rights and freedoms severely suppressed and the media and universities largely transformed into government instruments. Hence, Turkey faces a peculiar risk of alienation and decoupling in its relationship with global capitalism.

The new governance system has eliminated checks and balances and made the country vulnerable to the failings of a single person by largely disabling the parliament’s legislative and supervision functions, empowering the president to shape the judiciary and placing the executive under his exclusive control.

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On the executive front, the new system empowers the president to appoint Cabinet ministers and vice presidents, while remaining at the helm of his party. In one of his most notable moves, Erdogan merged the Treasury and the Finance Ministry, handing the post to his son-in-law Berat Albayrak. Major economic and financial institutions, including the central bank and public banks, were all attached to Albayrak’s ministry. In short, Erdogan established full control over the economy.

When it comes to the judiciary, 12 of the 15 Constitutional Court judges are appointed by the president, with the remaining three left to parliament. All members of the Court of Appeals, three-fourths of the Council of State members and four members of the 13-member Judges and Prosecutors Board are directly selected by the president, in addition to the justice minister and the minister's undersecretary who sit on the board.

The president also appoints the members of the Higher Education Board, which controls universities.

Parliament has lost most of its legislative influence over a president who has the power to govern by decree. Parliament can counter his decrees only if the opposition holds the majority in the legislature, which is not the case at present. Although the AKP lost its absolute majority in the June 24 polls, it continues to dominate parliament thanks to its alliance with the Nationalist Action Party.

The president is empowered to shape the country’s national security policies and can declare states of emergency. The parliament’s budget-making mandate has also been transferred to the president. A judicial probe against the president can begin only if 301 lawmakers in the 600-member parliament vote for such a move, while subjecting the president to a trial at the Supreme Court would require 400 votes. The president can also easily call elections.

Now that the country has acquired its new political clothing, the confidence of foreign investors is slipping further. Turkey’s risk premium hit a record high of 345 basis points Aug. 2 after Washington slapped sanctions on Ankara over the detention of an American pastor, marking an unprecedented low in the tense ties between the two NATO allies. A higher risk premium means higher borrowing costs for Turkey at a time when the provision of fresh external funds is crucial for its economy.

Key economic indicators have only worsened since the one-man regime began to function. Inflation has continued to climb, the Turkish lira has slumped further — with hard currency becoming even more expensive — and market expectations have hardly improved. Investors continue to shun the lira, whose freefall broke the psychological mark of 5 against the dollar Aug. 1. Normally, the central bank is supposed to hike interest rates to prop up the currency, but it has failed to act. As a result, the Turkish economy remains squeezed between rising hard-currency prices and already high lending costs of about 25%.

Under the impact of this pincer, year-on-year consumer inflation hit almost 16% in July, while producer inflation reached 25%, with no prospect of easing in the near future.

The tensions with the United States appear bound to add new layers to the economic fragilities, as the AKP refuses to abandon its confrontational tone vis-a-vis Washington. According to some observers, Ankara might even use the crisis as an opportunity to shift the blame of the economic downturn to foreign powers, especially the United States, perpetuating its long-standing narrative of external enemies seeking to undermine Turkey’s progress.

While announcing his 100-day program Aug. 3, Erdogan made another appeal to citizens to “take out” the hard currency and gold they keep “under the pillow,” convert their savings into Turkish liras and funnel them into the financial system. Yet given the ongoing increase in foreign exchange prices, his call appears to have had little effect, even on his own supporters. On another note, Erdogan said Turkey would not leave itself dependent on the West and turn to the Chinese market for borrowing, though he offered no explanation why the Chinese would treat Turkey differently than American and European lenders.

Given Turkey’s advanced integration with the global economy and its heavy dependence on it, Ankara’s task of managing the country's financial system is becoming increasingly difficult under the one-man regime. Turkey’s foreign trade amounts to half of its gross domestic product, and foreign assets in Turkey range between $650 billion and $700 billion. Unlike Iran and Russia, Turkey is not an energy exporter, which makes its new political outfit even more awkward to dance in on the Western-dominated economic scene.

Some observers suggest the AKP’s essential priority is to keep wearing the outfit rather than engage in the economic dance with the West. The AKP, the argument goes, has no other option but to preserve and impose the new clothing and cares little about what shape the economy will take in it, whether it is a collapse or contraction, and will rely on its political might to gag and suppress those who speak up to complain.

While the economic outlook appears to be pushing Turkey toward the International Monetary Fund (IMF), a critical question is looming for the AKP regime. If it chooses to seek IMF aid, the bailout would certainly come with strings attached. So would Turkey acquiesce to demands for transparency, accountability, stamping out cronyism and respect for human and property rights or would it choose to keep its new political attire untouched at the expense of whatever fate befalls the economy and force the nation to acquiesce to it? Will Turkish voters, including AKP supporters, tolerate an economic option involving high unemployment and poverty, and if they do, for how long?

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Mustafa Sonmez is a Turkish economist and writer. He has worked as an economic commentator and editor for more than 30 years and authored some 30 books on the Turkish economy, media and the Kurdish question.

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